Mexican Inflation Keeps a Step Ahead

Mexico’s inflation held stubbornly above the central bank’s 3% target in 2013, but the Bank of Mexico still managed to squeeze in three interest rate cuts to lower borrowing costs in a sluggish economy.

Thursday’s inflation report from the National Statistics Institute is expected to show the consumer price index up 0.53% in December, according to the median estimate of 10 economists polled by the Wall Street Journal, pushing the annual rate up to 3.93% from 3.62% at the end of November.

Contributing to the expected acceleration was a 67% rise in Mexico City subway fares, as well as seasonal increases in tourism costs over the holiday period, and the monthly rise in government-set gasoline prices.

The Bank of Mexico lowered its overnight lending rate target by a half percentage point in March, and by a quarter percentage point in both September and October, bringing it to 3.5%. The October cut was the last one for the foreseeable future, the bank said, as the board decided to watch for any inflationary fallout from this year’s tax increases.

“Inflation will get an upward push in early 2014, before gradually easing toward 3.6%, a rate we think will hold until the end of the year,” the Vector brokerage said in its 2014 outlook in which it estimated that higher taxes will add 40 basis points to the CPI, with the effect diminishing as the year progresses.

New levies in 2014 include taxes on soft drinks, junk food and fossil fuels.

Last year’s interest rate cuts led to the bank’s first split decisions since it began publishing minutes in 2011, with at least one of the five board members noting that annual inflation was persistently above the 3% target, although often within the 2%-4% target range. Policy makers could take some comfort from core CPI—excluding energy and fresh fruit and vegetables– which has been below 3% for most of the past year.

The interest rate cuts came as the economy advanced at its slowest pace since the 2009 recession, with gross domestic product expected to have ended last year up just 1.3%. The Finance Ministry is forecasting growth of 3.9% for 2014, supported by a more robust U.S. economy and increases in Mexican government spending.

The Bank of Mexico has put off expectations of reaching the 3% CPI target until 2015, and is widely expected to keep interest rates unchanged this year.

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